When the mafia extorts money from you to allow you to live, they call it "protection money." When the government does it, they call it "consumer protection." Either way, you are paying for protection from someone who has the power to take everything you have.

Tuesday, June 1, 2010

Could 2010 See the End of Seller Financing?

With the implementation of the SAFE (Secure and Fair Enforcement) Act which was passed and signed into law in 2008 but is just now being fully implemented in 2010, the real estate industry could see the end of one of its reliable mainstays--seller financing. The reason is that the SAFE ACT requires that all independent mortgage originators must be federally licensed. Originators who are working for depository lending institutions have to be registered. The federal license requirements include testing, continuing education, criminal background checks and a financial stability test. No one is really certain what that last standard means. It certainly involves a credit check and proof that the originator's financial affairs are in order.

Since states each have individual licensing requirements, federal licensing requirements are mandated in addition to state requirements. For example, in Texas, loan originators are required to complete 20 hours of continuing education for their licenses and are subject to state audits. An originator receiving his or her initial license must pass a test. In Texas our state regulator has a recovery fund instead of a bond. To get completely set up in the new national system, we have to complete a test for the state of Texas and a federal test; we also need to have completed our number of hours of continuing education for Texas and then our annual continuing education for the federal licensure. We pay into the recovery fund for Texas, but we need a bond for the federal licensure.

So what does this have to do with seller financing? The authors of the SAFE ACT did not make provision for seller financing--which has become very important over the last few years as credit has become much more difficult to obtain. The bill's authors did not even provide for seller-carried second liens. So in order to carry a second lien on a home, a seller would need to be licensed both for his state and nationally, as the law now stands.

The real world implications of this are huge. For example, many investors bought a lot of properties during the real estate boom. If the investor needs to free up some cash, he might want to sell one of them. But suppose his buyer cannot qualify under the strict new terms. Traditionally, he could ask for a down payment and then have his attorney write up a note dictating the interest rate and the terms. The buyer could then pay him. This is no longer true--now the seller would have to complete all of the licensure requirements both for the state in which he lives and the federal government before being able to carry the paper on his house. As a licensed loan originator, he will become subject to audits and investigations from the soon to be created Bureau of Consumer Financial Protection.

Or, take the even more common example of the seller who wants to sell his home, but the buyer cannot qualify for more than 80% financing. The seller might agree to carry a 10% second so that the buyer has to put only 10% cash into the transaction as down payment. Under the traditional system, the buyer and seller would agree to the terms. Then the loan originator would present the loan amount of the second lien that the seller was willing to carry along with proposed interest rate and payment, to the lender who is underwriting the first lien. The first lien mortgage underwriter approves the entire transaction, and then reviews the final note and payment schedule for the second lien to make sure that the terms have not changed. If everything is acceptable the transaction closes.

Not under the new system, though. In order to carry a seller-second, the seller needs a federal and state license. Since sellers normally carry seconds only when they really need to sell, a prohibition on seller financing will create a genuine burden on sellers and another obstacle to getting home financing as we move toward the second half of the year.

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About Me

In 1986, Alexandra Swann graduated at fifteen years of age with a bachelor’s degree in liberal arts from Brigham Young University and a GPA of 3.85. The following year, when she was sixteen, she received a Master’s Degree in History from California State University. After graduation, she taught history and English as a second language for four years at El Paso Community College. In 1989, her book, No Regrets: How Homeschooling Earned Me a Master's Degree at Age Sixteen, was published, in which she details her experiences with homeschooling. In 1993, the Swann Family was featured in the CBS Television Series, “How’d They Do That?”They were the subject of articles in The National Enquirer and Woman’s World, and were featured on Paul Harvey’s radio broadcast.

For fifteen years, from 1998- 2013, Alexandra was self-employed in the financial services industry in El Paso, Texas. As a small business owner who was active in the community and on various civic boards, she learned first-hand the challenges that excessive regulations create for small businesses. In 2012 she received the SBA’s Regional Minority Small Business Champion of the Year award.

In 2010, Alexandra and her mother incorporated Frontier 2000 Media Group to produce clean, wholesome, inspirational entertainment for families.She re-released No Regrets with a new foreword to the twentieth anniversary edition of the book updating readers on what her family is doing today. She is also co-author of four novels including The Fourth Kingdomwhich was selected as one of four finalists in the Christianity Today 2011 Christian Fiction Book Awards. Her solo novel, The Planner about the dangerous consequences of progressive big government and Agenda 21, was released in June of 2012. For more information visit her website at http://www.frontier2000.net